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Nonlinear dynamics of interest rate and inflation

✍ Scribed by Markku Lanne

Publisher
John Wiley and Sons
Year
2006
Tongue
English
Weight
142 KB
Volume
21
Category
Article
ISSN
0883-7252

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✦ Synopsis

Abstract

According to several empirical studies US inflation and nominal interest rates as well as the real interest rate can be described as unit root processes. These results imply that nominal interest rates and expected inflation do not move one‐for‐one in the long run, which is incongruent with theoretical models. In this paper we introduce a new nonlinear bivariate mixture autoregressive model that seems to fit quarterly US data (1953 : II–2004 : IV) reasonably well. It is found that the three‐month Treasury bill rate and inflation share a common nonlinear component that explains a large part of their persistence. The real interest rate is devoid of this component, indicating one‐for‐one movement of the nominal interest rate and inflation in the long run and, hence, stationarity of the real interest rate. Copyright Β© 2006 John Wiley & Sons, Ltd.

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